Sinopec Embraces Reform Amid China Push for Private Capital

The China Petroleum & Chemical Corp. (Sinopec) logo is displayed on a gas station in Hong Kong. Photographer: Jerome Favre/Bloomberg

March 24 (Bloomberg) -- Sinopec, Asia’s biggest refiner,
said it will push ahead this year with a government-driven
agenda to open up state-controlled industries, as China’s energy
companies search for private capital.

The company and domestic peer PetroChina Co. are seeking
private investors for some units. Sinopec, officially known as
China Petroleum & Chemical Corp., will sell as much as 30
percent of its oil retail business, in a sale Barclays Plc
estimates could raise more than $20 billion. PetroChina and its
parent China National Petroleum Corp., are considering opening
up areas including pipelines, oil and gas exploration and
refining to private capital.

“In 2014, the company expects to make significant advances
in its development by fully embracing reform, leading to
corporate transformation, organizational vigor and stronger
corporate values,” Sinopec Chairman Fu Chengyu said yesterday
in a statement.

“Sinopec is the most tied to the Chinese economy of the
major oil companies and the economy might be grinding a bit
slower this year,” said Simon Powell, head of oil and gas
research as CLSA Ltd. “All the talk of reform is great,
restructuring the marketing business is great, but the bottom
line is ultimately driven by the domestic economy.”

Reform Push

The refiner said oil and natural gas production rose 3.5
percent to 442.8 million barrels of oil equivalent last year.
Gas output increased 10 percent on 2012 levels. Sinopec forecast
production of 363.8 million barrels of crude oil in 2014 and
706.2 billion cubic feet of natural gas.

China is pushing the most aggressive reforms in more than a
decade as President Xi Jinping works to increase market forces
in the economy. The nation set a 7.5 percent target for growth
in 2014, matching last year’s goal, Premier Li Keqiang told the
annual legislature meeting in Beijing this month. China’s
economy actually grew 7.7 percent in 2013.

Sinopec approved last month the plan to seek private
investors for its oil retail unit, which operates the nation’s
largest network of more than 30,000 fuel stations.

“We will continue to promote transformation and upgrades
with a focus on improving development quality and efficiency,”
Fu said.

Capex Targets

The company set a capital expenditure target of 161.6
billion yuan for this year, 4.2 percent lower than a year ago.
Sinopec will focus spending mainly on exploration and
production, Fu said.

“We will strengthen our exploration effort in shale gas
resources in Fuling to achieve significant development of
China’s shale gas industry,” he said.

China Petrochemical Corp., the state-owned parent of
Sinopec, has said it will build shale gas capacity at its Fuling
site to 5 billion cubic meters a year by 2015, suggesting a
national target of 6.5 billion cubic meters will be met or
surpassed.

PetroChina, the country’s largest oil producer, is also
cutting expenditure. It said last week its spending target for
2014 was 7.1 percent lower than the previous year. The company
reported net income rose 12 percent to 129.6 billion yuan last
year, beating the 125.7 billion yuan mean of 13 analyst
estimates compiled by Bloomberg.

Price Target

Sinopec dropped 0.2 percent to HK$6.64 as of 10:39 a.m. in
Hong Kong, compared with a 1.1 percent gain in the city’s
benchmark Hang Seng Index. Sinopec has declined 4 percent in the
past year, compared with the Hang Seng’s 2.6 percent fall.

Rising refining costs, weaker income from oil and gas
production and still lofty capital spending may lower Sinopec’s
return ratio, while raising its net debt level this year, Hong
Kong-based Barclays’s analysts including Somshankar Sinha and
Ying Lou said in an e-mailed report today. Barclays cut
Sinopec’s target price by 3 percent to HK$6.80.

“With proven reserve cover in China now below nine years
and the company committed to its coal-to-chemical joint ventures
and still raising refining capacity, Sinopec may have limited
flexibility on spends unlike PetroChina,” the analysts said.

“We continue to prefer PetroChina, which has higher
earnings growth, a stronger balance sheet and cheaper
valuations,” according to the note. PetroChina gained 3.7
percent to HK$8.15.